How Inflation Silently Robs Your Retirement

Even with careful retirement planning, one risk that is often not planned for well-enough is inflation. Inflation alone can hit retirement assets the hardest. The budget retirees begin with will change easily within the first 5-10 years—even 20 years down the road. It is most likely that inflation, assuming a rate of 3-4%, will cause daily living expenses to double within 20 years. Retirees should plan for this because, according to life expectancy statistics, folks live 20-24 more years.

That said, the following things should be taken into consideration when planning the silent killer of retirement:

  1. With aging comes more health concerns and more medical bills. Given that inflation will increase day-to-day life, it is predicted that health care costs and services will increase, too.
  2. Social Security benefits will increase for retirees. In 2020, benefits went up by 1.6% which was an additional $24 paid out; accounted when considering cost-of-living adjustments. However, the extra money from SS is offset by huge cost increases across the board. For example, medical services and cost go up; as does Medicare costs. SS should only be considered a baseline for retirement funds.
  3. As mentioned, living expenses are predicted to double within 20 years due to inflation. With inflation, spending power for retirement assets could drastically be reduced if not accounted for properly.

Tacking this silent killer and its concerns takes careful planning and risk managing.

With life expectancy, family medical history and personal medical concerns need to be discussed. Family history of heart disease and cancer will affect your life expectancy. This in turn will determine how long your funds will need to last. If your family members are known to pass away early on or live well into their 90s, this will also factor into how long your funds will need to last. Longer life expectancy means a longer time inflation will affect cost and standard of living.

Reviewing medical history in advance will also allow for the retirement budget to account for any major medical expenses that could arise. For example, a history of knee injuries could mean a knee replacement in your early 70s. Your occupational hazards could cause late-life conditions. If you spent your working years in a steel mill, you have a higher risk for COPD. Planning for these major medical expenses in advance will allow for inflation to be accounted for, for the money to be there if necessary. In retirement, folks spend $250,000-300,000 in medical costs alone.

To account for inflation a realistic budget plan should be set. This includes daily expenses, monthly bills, and additional spending such as travel and hobbies. Factoring into this budget, would be those said medical costs, too. Once a budget and cost-of-living expenses are decided, it is important to review how high inflation rates and the historically low interest rates affect other return rates and income during retirement.

Have a strategy addressing inflation in place. Begin with small withdrawal rates and increase as cost-of-living and inflation go up. During retirement, the small withdrawal rates will be a huge part of your income. Larger withdrawal rates will make deplete retirement funds much sooner—potentially running out of money before running out of retirement. If possible, during working years, saving more will go a longer way. Investing your future retirement younger will also help offset inflation. Consider different income sources: Annuities, long-term care policies, life insurance policies.

Creating an income strategy and working with a Retirement Risk Advisor is key to a safe and secure retirement. Discussing options that can reduce inflation and provide the best management for retirement will save you money and time and give you peace of mind.

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Working Smarter, Not Harder: Leveraging Your Life Insurance Policy

An unconventional strategy for retirement, to maximize your life insurance policy is premium finance. Premium finance is where policyholders will pay substantial premiums via borrowing from a third-party lender—tying up the bank’s money versus your own capital. With some premium finance loans regular payments may begin shortly after the origination of the loan. However, there is a choice to capitalize interest into the arrangement with the expectation that the cash-value growth of the life insurance will outperform the accruing loan interest.

Premium financed life insurance allows the policyholder to purchase significantly more life insurance for a fraction of what is needed to support such a massive policy. This strategy keeps the policyholder’s other assets free to perform and produces an impressively tax-free internal rate of return for seemingly nothing out-of-pocket.

Ideally, the best method for premium financed life insurance polices is to create a compounding snowball effect for the cash value growth. The policy takes on the loan using built-in features. Moreover, it is when and if, the compounding cash value overcomes the hurdle of the premium finance loan’s interest rate. Future policy distributions may become death benefits to heirs, be tax-exempt retirement income, or possibly both.

How does premium financing work?

An affluent or emerging affluent individual with generally good health and a reputable credit rating may apply for a life insurance policy—be it for estate planning or retirement planning. For premium financing to occur, most of these policies will be whole life insurance or indexed-universal due to their stability and ability to offer higher loan-to-value ratio. With strong, long-term performance, the financed insurance policy will be funded at a maximum premium allowance for the first 4-7 years.

Depending on the situation, sometimes the borrower will pay the first premium themselves to avoid the need to post collateral. Often borrowers will involve a 3rd party lender to the larger premiums with the intent to begin interest-only payments directly to the lender. However, to fully capitalize on premium financing, borrowers roll the accruing interest into the loan with the high hopes the cash growth will outdo the finance loan.

This goes to say, the policyholder should prepare for posting collateral. If designed correctly, the life insurance can serve as the collateral due to its cash value growth.

Benefits to Premium Financed Life Insurance Policies:

  1. Ability to keep other assets active and growing.
  2. Replaces need to pay insurance premiums during your high-income working years.
  3. Potential for extremely positive arbitrage between cash value growth and premium finance loan rate.
  4. Potential of tax-exempt retirement income or greater death benefit payout.
  5. More cash value that compounds for you, not against you.

For more information on premium finance benefits and qualifications, listen to The Retirement Risk Show’s “Premium Finance: A Leveraging Method of Life Insurance” episode.

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